Miner Capitulation

Miner Capitulation Explained

In Bitcoin, profitability for miners is a function of the Bitcoin price and the cost for the miner to buy electricity to mine. When the price drops, less efficient miners are forced off the network because the bitcoins they earn are not worth the cost to mine. Many miners keep some or all of the bitcoins they mine in order to sell them in a bull market and get maximum value for them. The thinking in a “miner capitulation” scenario is that as the price drops and some miners are forced off the network, they will sell these reserve bitcoins, causing the price to drop further. In a worst case scenario, this could cause a “death spiral” in the price of bitcoin as you have continuous selling pressure on the price of bitcoin and a cascading effect wherein the lower price takes out more and more efficient mining operations until there are none left.

Criticisms of the Miner Capitulation Theory

First, this death spiral has never occurred, despite many historical examples of the price of Bitcoin shedding more than 50% of its value in a matter of weeks. The reason for this outcome is simple: Healthy mining operations have large funding sources that allow them to weather the hard times and continue mining. They also negotiate long term contracts with power companies to keep their energy prices low and predictable. Both of these allow miners to keep their bitcoins in reserve so that they don’t have to sell in a bear market just to keep their operation going. Inefficient miners do go under due to short term price drops, but this does not tend to affect the major players very much. When all the inefficient miners are gone, selling pressure stops and the hashrate and difficulty stabilize. The hardware of the inefficient miners that went under if purchased by more efficient miners, and put to use to bring hashrate and difficulty back up. This is why historical difficulty generally trends up.